Provident Fund: The 5-year Rule

<p><em>Those not completing five continuous years of service should transfer their PF balance to new employer to avoid TDS and reversal of tax benefits</em>, <em>writes</em><strong><em> Sunil Dhawan</em></strong><br><br>&nbsp;The employee provident fund amount withdrawn before completing five years of continuous service was always taxable. However, at times, employees failed to show it up in their income tax return and thus did not pay tax on it. Starting 1st June, those employees who withdraw their provident fund corpus before completing five years of continuous service will not receive the entire amount as there will be a tax deducted at source (TDS) on the amount.<br><br><strong>TDS Applicability</strong><br>TDS will apply if PF balance is more than or equal to Rs. 30,000.<br>TDA will apply if there is less than 5 years of continuous service.<br>TDS of 10 percent of amount will be deducted provided PAN is submitted else 34.608 per cent if one fails to submit PAN (and no Form No 15G or 15H).<br><br><strong>Existing Provident Fund 5-year Rule</strong><br>Any PF amount received before completing 5 continuous year of service is taxable in the year of receipt. If there is a change in employment and the amount has been transferred to the new employer, then the duration/period of previous employment will also be considered as part of continuous service. Say, an employee works for an organization for 4 years and withdraws his PF, then it becomes taxable. However, if he joins another firm and transfers the balance from previous firm to the new one, and leaves the second firm after 2 years, his service would be for 6 years. The amount withdrawn after 6 years is not taxable as he has rendered more than five continuous of service.<br><br>Further, the tax benefit that the employee has availed on self contribution towards his EPF as deduction under section 80C would be subject to tax as salary. Also, interest earned on the PF contributions during the years would be added to one’s income. In nutshell, all tax benefit s gets reversed if an employee withdraws before 5 years of continuous service<br><br>What to do: Instead of withdrawing the amount, transfer the amount to the PF account with the new employer. EPFO has made it easy by getting things done online. Transfer of PF balance from one employer to another is possible online and it takes around 30-45 days to happen. Keep transferring funds whenever you change jobs and avoid the temptation to withdraw. After all, it’s your money stashed away for your retirement years.&nbsp;</p>